Three Reasons Why Tesla Shares Look ‘Vulnerable’ (TSLA)

The toughest part about making money in the market is getting the timing right. Even when you’re ultimately right about the direction that a stock will move, if the timing is wrong, you’re stuck with a loss.

Last year, on a single bad earnings announcement, Tesla (NASDAQ:TSLA) began a three-day plunge, taking the stock down to around $180. If you were betting against Tesla, you could have made some nice money.

Then Tesla did what Tesla always does — rebound sharply. The stock now sits at $380.

But I am confident that you’re going to see another sharp plunge in Tesla very soon. Here’s why:

1. Management resignations. There’s been a huge wave of this — almost 40 senior executives have resigned in the past few months. This includes very senior people from key areas of the business, including the CFO, the VP of the Autopilot program, the VP of production and the director of battery technology.

These smart people were eager to jump aboard the Tesla ship when it was on the way up. But just as smart, they want to exit early now that Tesla’s peak valuation happens to coincide with significant business problems.

2. Lack of Innovation. The gap between expectations and reality on Tesla’s advancements in its battery is now getting too big for even Tesla bulls to dismiss. The actual performance and characteristics of the battery are significantly below what we were promised.

In addition, Tesla’s lead in this technology over its competitors is rapidly shrinking. Tesla is not nearly the unicorn that it’s made out to be. Don’t get me wrong. Tesla’s batteries are great. But with the stock at $350, they need to be more than great. They need to be uniquely and sustainably better than any of their competitors’. And they aren’t.

3. Cash burn. Yes, this is the same old argument. It is just as bad as, or worse than, it’s always been. Sooner or later it will matter. But again, trying to predict the exact day that the market decides to care is impossible.

If there is one thing that Tesla knows how to do better than build cars, it’s extract more and more cash from the capital markets. Tesla recently raised a whopping $1.8 billion in a bond sale. As always, Tesla’s timing to do this was impeccable. It occurred at peak market enthusiasm in the bond markets and coincided with lots of Tesla hype around the launch of the Model 3. As a result, Tesla was able to lock in a very low interest rate for itself of just 5.3% per year.

Clearly, this was a great deal for Tesla. But market enthusiasm quickly faded, and those investors who are set to receive just 5.3% per year saw their bonds lose 3% of that value in a single week.

While a few sell-side investment banks continue to tout the share price with higher and higher targets, outside analysts are growing increasingly skeptical. Even the optimistic ones are now starting to suggest that Tesla is at least 20% overvalued at current levels.

Obviously, let’s not forget that these sell-side investment banks touting the stock are the same ones who make millions of dollars when Tesla pays them to run equity and bond offerings.

The Tesla story is growing long in tooth. If we can get better visibility on how soon Tesla might drop, it might be a good time to hedge your bets against the automaker in the market.

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